For our purpose we have grouped them into some broad categories namely:

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a. Growth funds

b. Mid-cap funds

c. Value funds

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d. Equity-income funds

e. Index funds and ETFs

f. Sector funds

Overseas securities funds

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a. Equity linked saving schemes

Aggressive Investing

Growth Funds:

Growth funds’ investment is mainly in equity stocks of companies, which are expected to do better than the market. These companies feature above average increases in assets and earnings. The stocks typically payout little or no dividends since each company reinvest its earnings for expansion.

The category covers firms of different sizes, ages, and growth rates. High-expected growth and risk go hand in hand. The higher the expected growth rate, the riskier the company.

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The primary objective of such funds is to seek long-term capital appreciation (growth of capital). These funds are best suited for investors wanting their capital to grow, and are, therefore, to be considered as long-term investments held for at least three to five years. When it comes to risk, these funds belong to the category of moderate to high risk. Hence, are suitable for those investors who can be described as “fairly aggressive”.

Growth Orientation by Focusing on Mid-Cap Stocks

Mid-Cap Funds:

These funds share similarity with aggressive growth funds and sometimes get lumped together. Some mid-cap funds are more conservatively managed, so there is a distinction. As the name suggest mid-cap funds invest in mid­sized companies. Such companies grow at faster rate than large companies do because their expansion takes place on a smaller base of assets and revenues. These companies usually have a much narrower business focus than the large-companies.

Most funds in this category have a growth orientation. These funds seek companies whose earnings are expected to increase at a high rate. Such stocks generally have above average P/E ratios. But some mid-cap funds follow ‘value orientation’.

Value Investing

Value Fund:

Investment of these funds is mainly in equity stocks whose current valuation does not reflect some underlying value proposition. This philosophy is popularly known as Value investing’ and aims to seek out securities with the most promising potential for long-term growth.

Focus On Dividend Yield

Equity-Income Funds:

These are equity funds with the objective to pro­vide a major portion of total return through income and primarily invest in stocks that yield well above the average.

These portfolios are focused primarily on dividend yields. They seek yield significantly higher than that of an overall market yardstick such as BSE 30 or Nifty.

Fully Replicated Index Fund vs. Sampled Index Funds

Index Funds:

Index funds are portfolio of securities, which have been specifically designed to represent the characteristics and attributes of a chosen target index. Index funds can be constructed in a variety of ways. A portfolio, which com­prises of all the stocks, which comprise the index in the same proportion, is known as fully replicated fund. On the other hand, a sampled index fund makes investments only in stocks, which are part of the index.

An index fund closely replicates the composition of index and the return of the index. It is for the investor wanting to have a fund that follows the swings of the stock market.

The advantages of investing in an Index Fund are:

a. Diversification:

Since index schemes replicate to a’ large extent the market index, they provide diversification across various sectors and segments.

b. Low costs:

Index schemes are passively managed, as a result of which costs such as those relating to management fees, trade execution, research etc. are kept relatively low.

c. Transparency:

As indices are pre-defined, investors know the securities and proportion in which their money will be invested.

The year 1998 marked the launch of first index fund in India. By the end of 2009 there were about a dozen index funds available for investments.

Combining the Best Features of a Stock and an Index

Exchange Traded Funds:

Exchange traded funds popularly known as ETFs provide exposure to a selected index be it equity or debt. ETFs have a number of advantages over traditional open-ended index funds as they can be bought and sold on the exchange at prices that are usually close to the actual intra-day NAV of the Scheme.

ETFs are an innovation to traditional mutual funds as ETFs provide investors a fund that closely tracks the performance of an index with the ability to buy/sell on an intra-day basis. Unlike listed close ended funds, which trade at substantial premiums or more frequently at discounts to NAV, ETFs are structured in a manner which allows to create new units and redeem outstanding units directly with the fund, thereby ensuring that ETFs trade close to their actual NAVs. ETFs came into existence in the USA in 1993.

ETFs are usually passively managed funds wherein subscription/redemption of units works on the concept of exchange with underlying securities. In other words, large investors/institutions can purchase units by depositing the underlying securities with the fund and can redeem by receiving the underlying shares in exchange of units. Units can also be bought and sold directly on the exchange.

ETFs have all the benefits of indexing such as diversification, low cost and transparency. As ETFs are listed on the exchange, costs of distribution are much lower and the reach is wider. These savings in cost are passed on to the investors in the form of lower expenses.

Furthermore, exchange traded mechanism helps reducing collection, dis­bursement and other processing charges. The structure of ETFs is such that it protects long-term investors from inflows and outflows of short-term investors. This is because the fund does not bear extra transaction cost when buying/selling due to frequent subscriptions and redemptions.

Tracking error of ETFs is likely to be lower than a normal index fund. This is because (a) the creation/redemption of units through the in-kind mechanism, the fund can keep lesser funds in cash; (b) time lag between buying/selling units and the underlying shares is much lower.

ETFs are highly flexible and can be used as a tool for gaining instant exposure to the equity markets, equalizing cash or for arbitraging between the cash and futures market.

High-Risk High Return Category

Sector Funds and Segment Specific Funds:

Sector funds invest mainly in specific sector stocks. These funds concentrate in particular industry, such as tech­nology, telecommunication, FMCG, petroleum etc., Investors likely to go in for such funds are those willing to accept higher levels of risk as these funds normally have some limited diversification within their relative narrow range. These funds have a tendency to be more volatile than the broadly diversified portfolios. Also their returns frequently do not move in sync with the market averages.